• Washington: Seattle Passes New Tax on High-Income Earners
  • August 7, 2017 | Authors: David M. Kall; David D. Ebersole; Michelle Rood
  • Law Firms: McDonald Hopkins LLC - Cleveland Office; McDonald Hopkins LLC - Cleveland Office
  • The Emerald City is the latest to impose a tax on its wealthiest citizens. Seattle City Council’s ordinance, passed last Friday, imposes a 2.25 percent tax on the income of joint tax filers with income over $500,000, and on single tax filers with over $250,000 in total annual income. In earlier iterations of the ordinance, the tax was just 2 percent.

    According to the final summary and fiscal note, the tax is expected to generate $140 million in new revenue annually, and will be spent on the following:

    • Lowering the burden associated with property taxes and other regressive taxes
    • Addressing the homelessness crisis
    • Providing affordable housing, education, and transit services
    • Replacing funding that could be lost through federal budget cuts, including funding for mental health and public health services
    • Creating green jobs and meet carbon reduction goals
    • Paying the cost of tax administration and collection

    Implementing the tax may hit a snag, however, for two reasons. First, Article VII of the Washington Constitution requires all taxes to be “uniform upon the same class of property.” Property includes “everything, whether tangible or intangible, subject to ownership.”

    In addition, Washington state law prohibits counties, cities, and city-counties from levying an income tax. Even the state itself does not currently impose an income tax, which makes it one of only seven without one. The other six are Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming. New Hampshire and Tennessee tax only dividend and interest income.

    Opponents of the tax cite both of these provisions to justify their position that the ordinance is destined to ultimately fail. So does the Tax Foundation, which, for these same reasons, says the tax is “almost certainly illegal.”

    Supporters, without addressing the legal issues, instead characterize the ordinance as one of fairness. For instance, NPR quoted Seattle’s mayor as arguing that “[t]his is a fight for economic stability, equity, and justice,” though he added that uncertainty of federal funding for transportation, affordable housing, healthcare, and social services contributed to the need for the additional revenue.

    In an April article titled “Washington state relies on a rotten tax system,” a Seattle Times columnist opined that the existing state tax structure “would fail just about anyone’s fairness test because it relies mostly on property and sales taxes, which have inequality baked in.” An income tax would enable property and sales taxes to be lower, which would mitigate the effects of those taxes on the poor, who pay a higher percentage of their earnings on them.

    Referencing a report by the Institute on Taxation and Economic Policy, the columnist noted that in 2015, 20 percent of households in Washington with the lowest income paid 16.8 percent of that income in state and local taxes; nationally, this figure is just 10.9 percent. What is more, the percentage of income paid in taxes falls as income rises. In the Evergreen State, earners in the top 1 percent paid 2.4 percent of their income in state and local taxes, less than half of the national average of 5.4 percent.

    In contrast, the Freedom Foundation, a vocal challenger of Seattle’s new tax, promised a lawsuit, claiming that the ordinance amounts to “wealth redistribution” that is both ““unfair and un-American…Equal treatment is why the constitution has a protection like this. We don't let the majority persecute a minority.”

    According to the NPR story, the tax has more supporters than detractors. One said that “Seattle should serve everyone, not just rich folks.” Another said that she “would love to be taxed.”